Hedge fund and forex titan Stanley Druckenmiller believes current Federal Reserve policy and U.S. deficit spending are setting the U.S. dollar on a path to collapse. This morning he told CNBC’s Joe Kernen that it’s “more likely than not” the U.S. dollar will lose its status as the global reserve currency within 15 years. Druckenmiller’s comments were focused on the Fed’s commitment to low interest rates and U.S. debt bond buybacks, moves that ultimately support U.S. deficit spending on coronavirus pandemic relief.
Druckenmiller’s comments, though, were positive for one group already effectively shorting the dollar: cryptocurrency advocates. With the euro a basket case and the Chinese Communist Party-backed yuan still viewed with suspicion, Druckenmiller doesn’t see another fiat currency that can play the universal mediation role of the dollar anytime soon. Instead, he thinks “the most likely replacement” for the dollar would be a “crypto-derived ledger system.”
David Z. Morris is CoinDesk’s chief Insights columnist.
This is a remarkable set of statements from Druckenmiller, considered by some to be the greatest foreign exchange trader in history: He was the architect, among other big trades, of George Soros’ legendary shorting of the British pound in 1992. Now he’s echoing one of the most fundamental talking points of bitcoin advocates, who have for a decade contrasted the orange coin’s immutably fixed issuance with the propensity of states to let the money printer go brrr.
Inflation hasn’t been a major worry for the U.S. economy for decades – in fact, before the pandemic, the Fed regarded inflation as too low for nearly a decade. But pandemic spending has pushed the U.S. deficit and debt to record highs, causing widespread concerns about inflation risk. Inflation can be a major headache for dollar-denominated investors, since it erodes their holdings and gains. It can also be an annoyance for workers and consumers, though wages tend to inflate along with prices.
If the dollar becomes less attractive as a tool for foreign governments and global traders, the unwinding of its global reserve status could be downright catastrophic for pretty much everyone in the U.S. Somewhere between 40% and 72% of all U.S. banknotes are believed to be held abroad, and dollars make up over 60% of national foreign exchange reserves worldwide, according to the International Monetary Fund. If faith erodes, attempts to sell those positions could create a vicious downward cycle in the dollar’s value, which would have an array of negative impacts at home.
Despite clear longer-term trends in U.S. debt, it’s far from clear that right now is really the time to rein in spending. Druckenmiller argues that the ongoing U.S. recovery is so strong that further pandemic relief spending is unnecessary and even risky – but the relief spending appears to have been crucial to creating that recovery in the first place. In fact, some argue that the…